What is Flexible Inflation Targeting (FIT)? In the context of India’s emerging macroeconomic scenario, evaluate its effectiveness in achieving its stated objectives.
Answer: Flexible Inflation Targeting (FIT) was adopted in India in 2015 through a framework agreement between the Government and the RBI. Under Section 45ZA of the RBI Act, a 4% CPI target with a ±2% band was set. The Monetary Policy Committee (MPC) implements FIT, meets bimonthly, and publishes its decisions with the aim of balancing price stability, growth, and financial stability.
Objectives of Flexible Inflation Targeting and Evidence of Its Performance in India
- Anchored Inflation Expectations: Average CPI inflation fell from 9.5% (2012–2014) to 3.9% (2016–2020), mostly remaining within the 2–6% band. Example: Despite global shocks, headline ....
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